# SUPREME COURT REPORTS [1959] Supp. COMMISSIONER OF INCOME-TAX, WEST BENGAL v. CALCUTTA NATIONAL BANK LIMITED

- **Citation:** [1959] Supp. 2 S.C.R. 660
- **Court:** Supreme Court of India
- **Decided:** 1959
- **Case number:** Civil Appeal No. 4 of 1956
- **Bench:** B. P. Sinha, J. L. Kapur, M. Hidayatullah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/supreme-court-reports-1959-supp-commissioner-of-income-tax-west-bengal-v-1722
- **Pages:** 33

## Headnote

Excess Profits Tax-Rental income-Banking Company letting
out a part of its own premises-Liability-Excess Profits Tax Act,
I940 (XV of I940), s. 2(5). Sch. I, r. 4(4).
The respondent was a banking company and the question
was whether it was liable to pay excess profits tax on a sum of
Rs. 86,ooo received by it as rent in respect of the major part of
a six-storeyed building owned and constructed by it, which it
had let out, the rest being occupied by its headquarters in Calcutta. The Department and the Income-tax Appellate Tribunal
found against the respondent but the High Court, on a reference
under s. 66(r) of the Income Tax Act, reversed their decision.
The Memorandum of Association of the Company provided as
one of its objects as follows,-
" (e) To purchase, take on lease or in exchange or otherwise acquire any moveable or iinmoveable property, .............. .
which the company may think necessary or convenient for the
purpose of its business, and to construct, maintain and alter any
buildings or works necessary or convenient for the purpose
of the Company."
The question referred to the High Court for decision was
\vhether the said income was part of the business income taxable
under s. 2(5) read with r. 4(4) of the Sch. I to the Excess Profits
Tax Act, 1940. The High Court held that although the income
was derived from the holding of property, since the functions of
the assessee company did not consist wholly or mainly in the
holding of investments or other rroperty as required by the first
proviso to s. 2(5) of the Act, no question of the application of
r. 4(4) could arise.
Held, (Per Sinha and Hidayatullah, JJ., Kapur, J., dissenting), that the question must be answered in the affirmative.
Per SINHA, J.-The High Court was fundamentally in error
in overlooking the main provision of s. 2(5) of the Act, for even
though the first proviso might not apply, that by itself would
not render the main provision of the definition, which was wider
than that under the Indian Income-tax Act inapplicable.
Commissioners of Inland Revenue v. Desoutter Bros. Ltd.,
(r945) 29 T. C. r58, applied.
(2) S.C.R. SUPREME COURT REPORTS
661
The term 'business' was of wide import and each case had
to be determined with reference to the particular kind of activity or occupation of the person concerned. Though ordinarily
it implied a continuous activity in carrying on a particular trade
or avocation, it might also include an activity which might be
called 'quiescent•.
The Commissioners of Inland Revenue v. The South Behar
Railway Co., Ltd., (1923) 12 T. C. 687 and Commissioners of Inland Revenue v. The Korean Syndicate, Ltd., (1921) 12 T. C. 181,
referred to.
The Memorandum of Association of a company provided the
key to its business objects and the relevant clause in the instant
case clearly showed that the managing of property and realisation of rents therefrom were within the objects of the company,
and, therefore, such rents musf be included in calculating its profits under r. 4(4) of the Sch. I to the Act.
It was not correct to suggest that the rule, in substituting,
the word "partly" for "mainly" occurring in the first proviso to
s. 2(5) exceeded the provisions of the statute. Rule 4(4) did not
derive its operative force from that proviso, limited to an incorporated body of a particular type, and was of wider application
as evident from its own terms as also from the second proviso to
s. 2(5) of the Act.
Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax,
Punjab, (1940) A.C. 1055; [1940] 8 I.T.R. 636 and Sardar Indra
Singh and Sons, Ltd. v. Commissioner of Income-tax, West Bengal,
[1954] S.C.R. 167, referred to.
It was not correct to say that if rental income were to be
covered by the main clause of s. 2(5), the first proviso to that
section would become redundant.
Commissioners of Inland Revenue v. The Tyre Investment
Trust, Ltd., (1924) 12 T. C. 646, ·referred to.
Nor was it correct to say that "business" could not be said
to include-r

## Text

_Characters 0–39,947 of 75,945. This is a partial read: ask again with offset=39947 for what follows._

r959
Ap,.il 20.
660
SUPREME COURT REPORTS [1959] Supp.
COMMISSIONER OF INCOME-TAX, WEST
BENGAL
v.
CALCUTTA NATIONAL BANK LIMITED
(IN LIQUIDATION)
(B. P. SINHA, J. L. KAPUR and
M. HIDAYATULLAH, JJ.)
Excess Profits Tax-Rental income-Banking Company letting
out a part of its own premises-Liability-Excess Profits Tax Act,
I940 (XV of I940), s. 2(5). Sch. I, r. 4(4).
The respondent was a banking company and the question
was whether it was liable to pay excess profits tax on a sum of
Rs. 86,ooo received by it as rent in respect of the major part of
a six-storeyed building owned and constructed by it, which it
had let out, the rest being occupied by its headquarters in Calcutta. The Department and the Income-tax Appellate Tribunal
found against the respondent but the High Court, on a reference
under s. 66(r) of the Income Tax Act, reversed their decision.
The Memorandum of Association of the Company provided as
one of its objects as follows,-
" (e) To purchase, take on lease or in exchange or otherwise acquire any moveable or iinmoveable property, .............. .
which the company may think necessary or convenient for the
purpose of its business, and to construct, maintain and alter any
buildings or works necessary or convenient for the purpose
of the Company."
The question referred to the High Court for decision was
\vhether the said income was part of the business income taxable
under s. 2(5) read with r. 4(4) of the Sch. I to the Excess Profits
Tax Act, 1940. The High Court held that although the income
was derived from the holding of property, since the functions of
the assessee company did not consist wholly or mainly in the
holding of investments or other rroperty as required by the first
proviso to s. 2(5) of the Act, no question of the application of
r. 4(4) could arise.
Held, (Per Sinha and Hidayatullah, JJ., Kapur, J., dissenting), that the question must be answered in the affirmative.
Per SINHA, J.-The High Court was fundamentally in error
in overlooking the main provision of s. 2(5) of the Act, for even
though the first proviso might not apply, that by itself would
not render the main provision of the definition, which was wider
than that under the Indian Income-tax Act inapplicable.
Commissioners of Inland Revenue v. Desoutter Bros. Ltd.,
(r945) 29 T. C. r58, applied.
(2) S.C.R. SUPREME COURT REPORTS
661
The term 'business' was of wide import and each case had
to be determined with reference to the particular kind of activity or occupation of the person concerned. Though ordinarily
it implied a continuous activity in carrying on a particular trade
or avocation, it might also include an activity which might be
called 'quiescent•.
The Commissioners of Inland Revenue v. The South Behar
Railway Co., Ltd., (1923) 12 T. C. 687 and Commissioners of Inland Revenue v. The Korean Syndicate, Ltd., (1921) 12 T. C. 181,
referred to.
The Memorandum of Association of a company provided the
key to its business objects and the relevant clause in the instant
case clearly showed that the managing of property and realisation of rents therefrom were within the objects of the company,
and, therefore, such rents musf be included in calculating its profits under r. 4(4) of the Sch. I to the Act.
It was not correct to suggest that the rule, in substituting,
the word "partly" for "mainly" occurring in the first proviso to
s. 2(5) exceeded the provisions of the statute. Rule 4(4) did not
derive its operative force from that proviso, limited to an incorporated body of a particular type, and was of wider application
as evident from its own terms as also from the second proviso to
s. 2(5) of the Act.
Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax,
Punjab, (1940) A.C. 1055; [1940] 8 I.T.R. 636 and Sardar Indra
Singh and Sons, Ltd. v. Commissioner of Income-tax, West Bengal,
[1954] S.C.R. 167, referred to.
It was not correct to say that if rental income were to be
covered by the main clause of s. 2(5), the first proviso to that
section would become redundant.
Commissioners of Inland Revenue v. The Tyre Investment
Trust, Ltd., (1924) 12 T. C. 646, ·referred to.
Nor was it correct to say that "business" could not be said
to include-rental income.
The United Commercial Bank Ltd., Calcutta v. The Commissioner of Income-tax, West Bengal, [1958] S.C.R. 79, held inapplicable.
Per KAPUR, J.-The word 'business' could: either mean
what was contained in the main provision of s. 2(5) or have the
extended meaning given by the first proviso to that section. In
either case it was inapplicable to the case of the respondent
whose essential function was to deal in money and credit, letting out of property being neither wholly or even partly its business. The income received by the respondent, therefore, by way
of rent, did not fall within the definition of the word 'profits'
contained in s. 2(19) of ,the Act and was not chargeable to excess
profits tax under s. 4 of the Act.
Salisbury House Estate Ltd. v. Fry, (1930) 15 T. C. 2661
I959
Commissioner of
Income-tax~
West Bengal
v.
Calcutta National
Bank Limited
(In Liquidation)
662
SUPREME COURT REPORTS
[1959) Supp.
1959
Mellows v. Buxton Palace Hotel Ltd., (1943) 25 T.C. 507 and Commissioners of Inland Rcvenite v. Buxton Palace Hotel Ltd. (1948) 29
Connnissioner of T.C. 329, referred to.
Income-tax,
In construing the first proviso, effect must be given to every
West Bengal
word used. If the mere owning of immoveable property and the
v.
Calcutta Jl ational
Bank Limited
(In Liquidation)
Sinha].
letting out of what was not needed for its own use by a company
was intended to be covered by the definition, the use of the words
"wholly" or "mainly" would be wholly redundant.
Rule 4(4) of the first Schedule to the Act did not modify the
definition of 'business' so far as it related to holding of property
and before it could apply, the functions of the company, which
meant the activities apprnpriate to its business, must fall within
the definition of 'business' as given in the Act.
Per HrnAYATULLAH, J.-The rents realised by the respondent
must be regarded as profits from property held as investment
and included in the computation of profits under r. 4(4) of the
first schedule.
There was undeniably a difference between the wording of
the schedule and the Act and the tendency of the schedule was
to widen the definition of business so as to include letting of property for earning rents. It could not, therefore, be said that the
definition contained in the Act, wholly controlled the Schedule
and r. 4(4) must be given effect to.
Inland Revenue Commissioners v. Gittus, (1920) r K. B. 563,
applied.
Gittus v. Commissioners of Inland Revenue, (1921) 2 A.C. Sr,
referred to.
CIVIL APPELLATE JURISDICTION:
Civil Appeal No.
4 of 1956.
Appeal by special leave from the judgment and
order dated June 10, 1953, of the Calcutta High Court
in Income-tax Reference No. 39 of 1952.
K. N. Rajagopal Sastri, R. H. Dhebar and D. Gupta,
for the appellant.
B. Sen, P. K. Ghosh and P. ](, Bose, for the respondent.
1959.
April 20. The following Judgments were
delivered
SINHA, J.-The question for determination in this
appeal by special leave, is whether the assessee, the
Calcutta National Bank Ltd. (in liquidation), is liable
to Excess Profits Tax in respect of Rs, 86,000/-, which
it realised by way of rent of the building at its head9uarters in Calcutta, during the accounting period
(2) S.C.R.
SUPREME COURT REPOR'l'S
663
ending March 31, 1946. The Department and the
r959
Income-tax Appellate Tribunal answered the question
in the affirmative. On a statement of the case to the Commissioner of
I nconie-tax~
High Court under s. 66(1) of the Income-tax Act, a
West Bengal
Bench of the Calcutta High Court (Chakravartti, 0. J.,
v.
and Lahiri, J.) answered it in the negative, reversing Calcutta National
the orders of the Department and the Tribunal.
As
Bank Limited
the Bench refused to grant the necessary certificate (In Liquidation)
of fitness, the appellant applied for, and obtained,
Sinha 1.
special leave to appeal, by an order of this Court dated
September 27, 1954.
The facts of this case are short and simple. The
assessee was a banking company in a large way of
business. It owns a six-storeyed building where its
offices are located on the ground floor and a part of
the 6th floor, while the rest of the building is let out to
tenants. The annual rental income derived from the
portion let out, is about Rs. 86,000/-. The Tribunal
found that the portion let out is about four to five
times the floor area of the portion of the building
occupied by the assessee for the purposes of its own
business. By an order dated March 31, 1949, the
Excess Profits Tax Officer assessed the respondent on
the said rental income in respect of the accounting
period ending March 31, 1946, under sub-r. (4) of r. 4
of Schedule I to the Excess Profits Tax Act, 1940
(XV of 1940) (which hereinafter will be referred to as
the Act). On appeal by the respondent, the Appellate
Assistant Commissioner, by his order dated January 3,
1950, upheld the assessment on the basis of sub-r. (2)
of r. 4 of Schedule I to the Act.
He pointed out that
the assessee carries on banking business which includes holding investments, and thus, the rental income in respect of its investments in immovable property, is included in its business income, even though
it was not chargeable to income-tax under s. 10 of the
Income-tax Act.
Income from securities, like shares
and properties, is chargeable to income-tax under
ss. 8, 9 and 12 of the Act; but that head of income is
chargeable under the Act as business profits. He also
pointed out that the assessee had itself included the
value of these assets in the computation of its capital,
•
•
664
SUPREME COURT REPORTS [1959] Supp.
i959
for claiming standard profits.
This had been done in
Commisoioner of the previous years, and the assessee bank had acceptIncome-tax.
ed the basis and the computation of capital assets
west Bengal
during the previous years. On a further appeal by
v.
the respondent to the Appellate Tribunal, the TribuCalcutta National nal held that there was no doubt that the premises
Bank. Limit'.d
were built with a view partly to housing the head
(In Liquidation) office of the company, and partly for the purpose of
Sinha ] .
being let out to tenants, and that it was an investment by the Bank in immovable property. The Tribunal also found that this was within the terms of the
Memorandum of Association of the respondent company. Hence, by its order,dated March 22, 1951, the
Tribunal held that the letting out of so much of the
building as was not occupied by the company itself
for its own business, was a part of its business, and
the rental income was, thus, liable to tax under the
Act. It made a particular reference to sub-r. (4) of
r. 4 of Sch. I to the Act, though the Department
appears to have also relied upon sub-r. (2) of r. 4,
aforesaid. Thereupon, the respondent got the Tribunal to. state the case to the High Court, and the following question was accordingly referred to the High
Court under s. 66(1) of the Income-tax Act:-
"Whether in this case the rental income from
immovable property is part of the business income
taxable under section 2(5) read with rule 4(4) of Schedule I attached to the Excess Profits Tax Act, 1940."
The matter was heard by the High Court with the
result indicated above.
Hence, this appeal by special
leave.
There is no doubt that excess profits are not chargeable under the Act unless the income falls within the
ambit of business profits. Section 2(5) of the Act defines " business " as under :-
" 'business ' includes any trade, commerce or
manufacture or any adventure in the nature of trade,
commerce or manufacture or any profession or vocation, but does not include a profession carried on by
an individual or by individuals in partnership if the
profits of the profession depend wholly or mainly on his
or their personal qualifications unless such profession
(2) S.C.R. SUPREME COURT REPORTS
665
consists wholly or mainly in the making of conz959
tracts on behalf of other persons or the giving to other c
-. -.
f d .
f
. I
.
omm1ssioner of
persons o a vice o a commercia nature m connecIncome-tax
tion with the making of contracts:
West Beng~l
Provided that where the functions of a company
v.
or of a society incorporated by or under any enact- Calcutta Na'.ional
ment consist wholly or mainly in the holding of invest-
(IBanLk. L•.mdit~d)
h
.
.
n
iqui ation
ments or ot er property, the holdmg of the rnvest_
ment· or property shall be deemed for the purpose of
Sinha J.
this definition to be a business carried on by such company or society:
Provided further that all businesses to which
this Act applies carried on by the same person shall
be treated as one business for the purposes of this
Act;".
The definition of " business " under the Act, is wider
than the definition of that term under the Income-tax
Act (s. 2(4)).
Section 2 (19) of the Act defines "profits " as follows :-
" ' profits ' means profits as determined in accordance with the First Schedule."
Section 2 (20) defines " standard profits " as follo"4S :-
"Standard profits means standard profits as computed in accordance with the provisions of Section 6".
And the charging section, s. 4 of the Act, provides
that in respect of any business to which the Act
applies, excess profits, that is, profits during any
chargeable accounting period, exceeding the standard
profits, shall be charged, levied and paid. Section 5
of the Act provides as follows:-
"This Act shall apply to every business of which
any part of the profits made during the chargeable
accounting period is chargeable to income-tax by
virtue of the provisions of sub-clause (i) or sub.clause
(ii) of clause (b) of sub-section (1) of Section 4 of the
Indian Income-tax Act, 1922, or of clause (c) of that
sub-section :
Provided that this Act shall not apply to any
business the whole of the profits· of which accrue or
arise without British India where such business is
carried on by or on behalf of a person who is resident
84
666
SUPREME COURT REPORTS [1959] Supp.
z959
but not ordinarily resident in British India unless the
business is controlled in India ;
Commissioner of
Provided further that where the profits of a part
Income·tax,
west Bengal
only of a business carried on by a person who is not
v.
resident in British I!1dia or not ordinarily so resident
Calcutta National accrue or arise in British India or are deemed under
(IBonLk. Lfrdnited l the Indian Income-tax Act, 1922, so to accrue or arise,
niqmatwnh
th thb"
b"
hb"
f
_
t en, excep w ere
e usmess emg t e usmess o a
Sinha J.
person who is resident but not ordinarily resident in
British India is controlled in India, this Act shall
apply only to such part of the business, and such part
shall for all the purposes of this Act be deemed to be
a separate business ;
Provided further that this Act shall not apply to
any business the whole of the profits of which accrue
or arise in an Indian State; and where the profits of a
part of a business accrue or arise in an Indian State,
such part shall, for the purposes of this provision, be
deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and
the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business."
The First Schedule, which contains the rules for computation of profits, provides, in sub-r. 4 of r. 4, as
follows:-
" (4) In the case of a business which consists
wholly or partly in the letting out of property on hire,
the income from the property shall be included in the
profits of the business whether or not it has been
charged to income-tax under Section 9 of the Indian
Income-tax Act, 1922, or under any other section of
that Act."
Having set out the relevant ·provisions of the Act,
the first question that arises for consideration, is whether the letting out of the premises in question can be
said to be a business of the assessee bank. The definition of " business " is only an inclusive one, and
includes any sort of trade, commerce or manufacture.
Can it be said that realization of income from its
investments which may be either in shares, securities
or in immovable properties, is not a part of the business of a banking corpora ti on ? In my opinion, it will
(2) S.C.R. SUPREME COURT REPORTS
667
be taking a very narrow view of the functions of a
x959
bank to hold that such activities are not within the c
.-.
b't f h
b •
t' 't'
f
b
k
I
th
ommissioner of
am I
o t e
usmess ac iv1 ies o a an .
n
e
Income-tax
Memorandull1 of Association of the assessee bank, the
west Beng;l
objects of the company are stated to be:
v.
"(a) To carry on all kinds of banking business Calcutta National
that are generally carried on by Joint Stock Banks ... "
Bank. Limited
" (b) T
h b ·
f b k'
·
11 't
(In Liquidation)
o carry on t e usmess o
an mg m a
I s
branches and departments, including borrowing, raisSinha 1.
ing or taking up money, the lending or advancing
money, securities or properties ; ......... the acquiring,
holding, issuing and dealing with ... investment of all
kinds; ......... the managing of properties ......... "
"(c) To purchase, take on lease or in exchange or
otherwise acquire any moveable or immoveable property,. ........ which the Company may think necessary
or convenient for the purpose of its business, and to
construct, maintain and alter any buildings or works
necessary or convenient for the purpose of the·company."
Apparently, the bank constructed the six-storeyed
building not only for its own use and occupation, but
also, according to the finding of the Appellate Tribunal, for the major part, for the purpose of realising
rent from tenants. Where land in a big city, like
Calcutta, is taken for building purposes, it is common
' knowledge that erecting a multi-storeyed building, is
by itself an investment, besides affording accommodation for the bank to carry on and advertise its business, and house its head-office and records.
The High Court answered the question referred to,
in the negative on the ground that though the income
was derived from the holding of property, the functions of the assessee-company did not consist wholly
or mainly in the holding of in vestments or other property, as required by the proviso to s. 2(5) of the Act.
Since the requirement of the first proviso to s. 2(5) of
the Act, was not satisfied, no question of the application of sub-r. (4) of r. 4, could arise; and even if such
a question could arise, the word " business " in that
sub-rule, must take its colour from the main provisions of the section. This conclusion was reached by
668
SUPREME COURT REPORTS [1959] Supp.
1959
the learned Chief Justice, who delivered the opinion
Commission" of of the Court, by starting with the premise that for
determining the nature of the income of the company,
Income-tax,
west Bengal
it was not necessary to consider the provisions of the
v.
definition of " business '', contained in the main clause
Calcutta National of s. 2(5), which was also assumed to be parallel to the
Bank Limited
connotation of the term " business " under the Indian
(In Liquidation) I
A
H
.
h
1 d d
. h
ncome-tax
ct.
avmg, t us, exc u e , wit out
Sinha J.
giving any reasons why they had to be excluded, the
provisions of the main clause of the definition of
"business", as contained in the Act, the learned Chief
Justice addressed himself to the question whether the
first proviso to the definition clause, which was in the
nature of an additional provision, could govern the
facts of the case, and bring it within the ambit of that
kind of business ·to which the Act applied. The
learned Chief Justice rightly pointed out that the first
proviso is limited to incorporated bodies and had no
reference to individuals. Then, the learned Chief
Justice observed : " It is to be noticed that in the
contemplation of this proviso, property is something
different from investments, for it speaks of' investments or other propert.y '. It is also to be noticed
that if the requirements of the proviso are satisfied,
the holding of investments or other property shall be
' deemed to be a business ', which implies that it is not
really a business and, but for the special provisions
made by proviso, would not be . within the general
definition contained in the main clause ". It is doubtful whether these observations are entirely correct,
but, as will presently appear, we are not so much
concerned with the proviso as with the main provisions
of the definition clause (s. 2(5) ).
The conclusion of
the learned Chief Justice may better be stated in his
own words, as follows :-
"It appears to me that the first matter to which
we must address ourselves in answering the question
before us is : are the functions of· the assessee company such that the holding of the building in question
or buildings or other property &nd investments in
general must be deemed to be its business for the pur-
·poses of the Excess Profits Tax Act under the first
(2) S.C.R.
SUPREME COURT REPORTS
669
proviso to section 2(5) ? In order that that question
1959
may be answered in favour of the Revenue, it is Conzmissioner of
necessary that the holding of investments or other
Inconze-tax,
property should be the only or the principal function
West Bengal
of the assessee company. As I have said, the assessee
v.
company is a banking company in a large way of Calcutta Natfonal
business. It is hardly disputable and indeed it was
Banh Limited
d.
d b £
h
b b Jd' •
f ·
t
(In Liquidation)
not ispute
eiore us, t at t e o rng o mvestmen s
or other property was not its sole or primary occupaSinha 1.
tion, much less the holding of the particular building
in question".
In my opinion, the aforesaid conclusion of the High
Court suffers from two fundamental errors, namely,
(1) that the main clause of the definition section is
out of the way in determining the present controversy,
and (2) that it was the proviso only which had to be
considered in order to answer the question referred.
In the first instance, the learned Chief Justice is not
entirely correct in observing that the definition of the
term "business" follows the definition of the same
term in the Indian Income-tax Act.
As already
observed, the definition under the Act, is wider than
that under the Income-tax Act, in so far ·as it includes
certain types of profession or vocation. The scheme of
the Act, as compared to that of the Income-tax Act,
will have to be considered presently, but it is enough
to point out that the connotation of the term "business" under the Act, is wider than that of the same
term under the. Income-tax Act. The learned Chief
Justice set aside, from his consideration, the provisions of the main clause of s. 2(5), and did not indicate
his reasons for doing so.
Ordinarily, the Court has
first to consider whether the main clause of the definition Of the term " business ", would govern the facts of
the case. The question of the application of the first
proviso, which, it is common ground, is in the nature
of an additional provision which brings within its
ambit certain types of income (to use a neutral term)
which would not otherwise have come within the
terms of the main clause of the definition, can arise
only if the Court first comes to the conclusion that the
main clause of the definition is out of the way. I will
670
SUPREME COURT REPORTS [1959] Supp.
z959
assume that the holding of investments or other proCommission" of property, is not the whole or main business of the
Income-tax.
Respondent Company. That assumption will put
w,,1 Bengal
aside the first proviso aforesaid, but that does not by
v.
itself lead to the inference that the main provision of
Calcutta National the definition clause, cannot be applied to the responBank Limited dent.
An argument on these lines was advanced; and
(Tn Liquidation)
J] d b
L
was repe e
y
ord Greene, M. R., in the case of
Sinha J.
Commissioners of Inland Revenue v. Desoutter Bros.,
Ltd. (1). In that case, sub-s. (4) of s. 12 of the Finance
(No. 2) Act, 1939, which deals with Excess Profits
Tax, was under consideration by the Court of Appeal.
The learned Master of Rolls considered the question,
and made the following observations which apply
with full force to the arguments which found favour
in the High Court:-
.
"The first argument is based on the language of
Section 12(4) of the Finance (No. 2) Act, 1939, which
deals with Excess Profits Tax. The first Sub-section
speaks of the profits 'arising in any chargeable
accounting period from any trade or business to which
this section applies'. It is in respect of those profits
that the tax is exigible. It will be observed that the
language only extends to the profits arising from ' any
trade or business'. Sub-section (4) says 'Where the
functions of a company or society incorporated by or
. under any enactment consist wholly or mainly in the
holding of investments or other property, the holding
of the investments or property shall be deemed for the
purpose of this section to be a business carried on by
the company or society'."
" I should have thought that the objects of that
Sub-section were manifest. In my view it was intended, and quite clearly intended, to bring into the net a
type of corporation which otherwise would or might
have escaped it. The commonest type of corporation
with which the Sub-section is <lea.ling is what may be
called a trust investment company, whose business is
the holding of investments and deriving income from
them. Such a corporation would not be said to be carrying on a 'trade or business' within the meaning of
(r) (1945) 29 T.C. 155, 160.
(2) S.C.R. SUPREME COURT REPORTS
671
Sub-section (1).
Anyhow, if it were not absolutely
z959
clear, Sub-section (4) makes it quite certain that that
.-.
t
f
t .
. t b . l d d
d "t
.
Commissioner of
Ype o corpora ion is o e me u e , an
1 s operations
1
1
ncome~ ax#
are to be regarded as the carrying on of a trade or
west Bengal
business. That seems to me to be the real and sole
v.
object of Sub-section (4)."
Calcutta National
"The argument really amounted to this: by impli- •. Bank. Limit~d
cation the profits from investments or property held (In Liquidation)
by any other type of corporation is excluded. I cannot
Sinha 1.
begin to see the shadow of a foundation for any such
argument. In my opinion it breaks down completely
once the real significance of Sub-section (4) is appreciated."
I respectfully adopt the reasoning and the conclusion arrived at by the Court of Appeal, extracted above.
It follows that the first proviso to s. 2(5) does not determine the controversy arising in this case. This conclusion completely displaces the ratio of the opinion of
the High Court, but it does not answer the question
referred to it. It has, therefore, to be considered whether the main definition clause ins. 2(5) can come into
play in giving the answer to the question referred for
the opinion of the High Court.
The term "business "
is a word of very wide, though by no means determinate, scope. It has rightly been observed in judicial
decisions of high authority that it is neither practicable
nor desirable to make any attempt at de-limiting the
ambit of its connotation. Each case has to be determined with reference to the particular kind of activity
and occupation of the person concerned. Though
ordinarily "business" implies a continuous activity in
carrying on a particular trade or avocation, it may
also
include an activity which may be called
'quiescent'. This is illustrated by the case which
went up to the House of Lords in The Commissioners
of Inland Revenue v. The South Behar Railway Go.,
Ltd. {1). In that case, the facts were these.
Down to
1906, the South Behar Railway was held by the Respondent Company and worked by another Company
on behalf of the Secretary of State for India, the
Respondent Company being entitled to a share in the
(1) (1923) 12 T. C. 657.
672
SUPREME COURT REPORTS . [1959] Supp.
z959
profits in consideration of its having supplied funds
and materials for the construction of the Rail way.
Commissioner of In 1906, the Respondent Company relinquished possesIncome-tax,
West Bmgal
sion of the Railway to the Secretary of State, on the
v.
stipulation that until the option to purchase was
Calcntta National exercised, a fixed annuity of£ 30,000 should be paid to
Ban~ Limit'.d :the Company in lieu of the share of profits so far paid.
(In Liquidation) After that arrangement in 1906, the Company did
Sinha J.
nothing but receive and distribute the said annuity to
its share-holders. It ,was held by the House of Lords
that the Company was carrying on a trade or business,
and was, therefore, liable to Corporation Profits Tax.
The House of Lords, while affirming the decision of the
Court of Appeal, observed that the finding of the Commissioners, which was reversed by the Court of Appeal,
was not a finding of pure fact, but was an inference of
law, derived from the specific facts found in the case,
and that, consequently, the decision was open to
review.
The House of Lords, in upholding the decision of the. Court of Appeal, observed that by the
agreement of 1906, the Company's income, which previoμsly was a fluctuating income derived from the
share of the profits, had been converted into a fixed
annuity irrespective of the earnings of the Railway ;
and that the new arrangement did not materially
affect the position of the Company as a business concern. The House of Lords approved of the decision in
the case of the Commissioners of ln/,and Revenue
v. The Korean Syndicate, Ltd.('). In that case, a
Syndicate was registered in 1905 as a Company for
the purposes of acquiring and working concessions
and turning them to account, and of investing and
dealing with any moneys not immediately required.
In 1905, the Syndicate acquired part of a right to a
concession in Korea, which included a gold mine, but
in 1908, it assigned its rights to another Company
under an agreement of lease in consideration of certain royalties, but which were really a percentage of
the profits in working the prope_rty.
In 191l, the
Syndicate placed in deposit at a bank, certain sums of
money received from the sale of shates which had
(1) (1921) 12 T.C. 181.
(2) S.C.R. SUPREME COURT REPORTS
673
I959
been obtained by the Syndicate in exchange for other
shares.
During the relevant period, the Syndicate's
fi
d
· ·
b
k .
d Commissioner of
activities were con ne to rece1v111g an mterest an
Income-tax,
royalties and distributing that income amongst its
west Bengal,
shareholders. Rowlatt, J. held, that the Company
v.
was not carrying on a business.
On appeal, it was Calcutta National
held that the Syndicate was carrying on a business
Bank Limited
and that the profits derived therefrom, were liable t~ (In Liquidation)
Excess Profits Tax. In order to ascertain the business
of a Company, its Memorandum has to be looked into.
The Memorandum provides the key to what the business objects of the Company are, and it has further to
be ascertained whether those objects are still being
pursued. In the present case, the relevant clauses of
the Memorandum of Association, have been set out,
and there cannot be the least doubt that the managing of property and realisation of rents therefrom, was
within the objects of the Company, if it found it
necessary and convenient for carrying on its business.
It may be that this line of business activity may not
be the main part of its business, but even so, if realisation of rent is one of the sources of business income
to the Company, it has got to be included in the computation of its profits for the purposes of the Act.
This becomes clear on a reference to sub-r. (4) of r. 4,
quoted above. But it has been contended that the
words" wholly or partly" in the Rule, are in excess of
the provisions of s. 2(5), where, in the first proviso, the
words are " wholly or mainly ". The suggestion is
that the rule, in so far as it substituted " partly " for
"mainly ", is in excess of the provisions of the statute.
In my opinion, this argument is based on an assumption which is not well-founded.
As will presently
appear from an examination and comparison of the
provisions of the Act and the Income-tax Act, r. 4(4)
does not n\lcessarily derive its operative force from
the first proviso to the main clause Of the definition in
s. 2(5).
The proviso, as already observed, is limited
to an incorporated body of a particular type, and has
reference to the " holding of investments or other property". Rule 4(4) is of a more general application to
Sinha ].
674
SUPREME COURT REPORTS [1959] Supp.
'959
a "business which consists wholly or partly in the
Commissioner of letting out of property on hire ". In the rule, a referIncome-tax,
ence to s. 9 of the Indian Income-tax Act, also makes
West Bengal
it clear that the rule is concerned with "property ''.
v.
.
It is also clear that the basis for taxation of property
Calcutta National under s. 9 of the Income-tax Act, is different from the
Bank Limited
b • ft
t'
d
th A t '
f ·
(In Liquidation)
as1s o axa 10n un er
e
c ! I? respec~ o mcome
from property, and the latter 1s 1rrespecjave of wheSinha J.
ther income from property has been the subject-matter
of charge under the Income-tax Act. In this connection, a reference to the second proviso is also relevant
in so far as it implies that a person may carry on
businesses of differ!mt kinds, and all those different
lines of business have, for the purposes of the Act, to
be treated as one business.
Thus, the Bank may be
carrying on the business of holding deposits, securities
and property, as also lending money on different kinds
of securities. Its income from all those activities,
would have to be taken into account in order to determine its total business profits.
A similar question
arose in the case of Punjab Co-operative Bank, Ltd. v.
Commissioner of Income-tax, Punjab('), which went
up to the Judicial Committee of the Privy Council.
In that case, the question arose whether the realisation of higher values by sale and purchase of shares
and securities by the Bank, could be said to be business profits, and thus, taxable, under the Indian Income-tax Act. On behalf of the Bank, it had been
contended throughout, without success, that the realisation of higher values by the sale of shares and
securities, was not a separate business of the Bank,
but was in the way of its business as a banking corporation which had to deal with money and credit, and
that the Bank had always to have in its hands, cash
and easily realisable securities to meet any probable
demands by its depositors. But it had been found as
a fact that the Bank had been selling shares and securities not only for the purpose aforesaid, but also for
augmenting its reserve funds. It was held by the
Judicial Committee that it had been rightly decided
·by the Department and by the High Court, on a
(1) (1940) AC. 1055; [1940] 8 I.T.R 635.
(2) S.C.R. SUPREME COURT R.EPOI~TS
675
reference, that the purchase and sale of shares and
1959
securities were a part of the banking business of the
h
fi
h
· I
I
Commissioner of
Company, and t e pro ts, t us, rea ised were iable to
Income-tax,
income-tax. Their Lordships of the Judicial Comwest Bengal
mittee also observed that it was not necessary to estav.
blish that the Bank had been carrying on a separate Calcutta National.
business of buying and selling shares and investments
Bank Limited
in order to make profits thus made taxable. On<re it (Tn Liquidation)
is found that such transactions were entered into by
Sinha ].
the Bank not merely with a view to realisation or
change of investments, but with a view to carrying
on a business in the sense of earning profits, the Bank
was really carrying on a business within the meaning
of the Income- tax· Act.
,
Following this decision of the Privy Council, this
Court decided in the case of Sardar Indra Singh and
Sons
Ltd.
v. Commissioner of Income-tax,
West
Bengal (1) that the question whether a certain income
is profit from business and not an appreciation of
capital arising from a change of investment, depends
upon the answer to the further question whether that
income was so connected with the carrying on of the
assessee's business that it could fairly be said that it
is the profits and gains of the business in its normal
working. It was not necessary further to _show that
the income had resulted from a course of dealing
which, by itself, would amount to the carrying on of a
business. In that case, the assessee company had, as
one of its objects to carry on the business of financiers,
and to purchase and sell stock, shares, 1business concerns and other undertakings. In carrying out that
objective, the company held a large number of shares
in other companies, and was realising its holdings and
acquiring new shares. In the background of those
facts, it was held by a Bench of five Judges of this
Court, that the profits made from the sale of investments and the making of fresh investments, were
assessable to income-tax. In the course of his judgment, Patanjali Sastri, C. J., speaking for the Court,
made the following very pertinent observations:-
"The principle applicable in all such cases is well
(1) [1954] S.C.R.,167, 170, 171,
676
SUPREME COURT REPORTS [1959] Supp.
'959
settled and the question always is whether the sales
which produced the surplus were so connected with
Co1ninissioner of the carruing on of the. assessce's business that it could
Income-lax,
.J
west Dengal
fairly be said that the surplus is the profits and gains
v.
of such business. It is·not necessary that the surplus
Calcutta Natfonal should have resulted from such a course of dealing in
Banh L•m•ud
securities as by itself would amount to the carrying on
(In Liquidahon)
f
J
•
f b
·
d
lJ'
' ·
I
Jd
o 'll. Jusmess o
uymg an se mg securities. t wou
Sinha ; .
be enough if such sales were effected in the usual
course of carrying on the business or, in the words used
by the Privy Council in Punjab Go-operative Bank Ltd.
v. Income Tax Commissioner, Lahore (1), if the realisation of securities is a normal step in carrying on the
assessee's businef!s. Though that case arose out of the
assessment of a banking business, the test is
one
of general application in determining whether the
surplus arising out of such transactions is a capital
receipt or a trading profit."
But the learned counsel for the Respondent Bank
argued that in the present case, the earning of rental
income by the Bank could not come within s. IO of
the Income-tax Act, and the definition of "business"
in the Act and in the Income-tax Act, in so far as they
are relevant to the present case, must be the same. In
other words, it was contended that as realisation of
rents from·. house property of the Bank, could not come
within the purview of s. IO of the Income-tax Act, it
could not also come within the purview of the Act we
are now concerned with. In my opinion, there is a
fallacy in this argument. The scheme of the two Acts
is not the same. The Income-tax Act has brought
within its taxing ambit, not only income from what is
ordinarily called business, but income from several
other sources. Sections 3 and 4 of the Income-tax Act
render liable to tax "all income, profits and gains from
whatever source derived'', and s. 6 of the Income-tax
Act, classifies the different heads of income, profits
and gains into (I) salaries, and the manner of charging
the same is laid down in s. 7 ; (2) interest on securities,
and the manner of charging the tax is laid down
in s. 8; (3) income from property, to be taxed in
·(r) (1940) A. C. 1055; [1940] 8 I. T. R. 635.
(2) S.C.R.
SUPREME COURT REPORTS
677
accordanc~ with the provisions of s. 9; and (4) profits
r959
and gains from business, profession or avocation, to be C01nm4ss-ioner of
taxed in accordance with the provisions of s. 10.